You could be someone who is respectful of, or has a passion for a particular non-profit organization or charity. Perhaps you donate regularly to this organization, understanding that the money you give can do anything from improving survival rates of diseases, to providing clean drinking water to third-world countries, to supporting homeless animals at the local shelter.
And, if you are a real estate owner, you could provide even more financial assistance to that favored charity or organization, without the burden of capital gain taxes. Sound too good to be true? It is true, and it can be done through a charitable remainder unitrust, or CRUT. A CRUT is a tax-exempt, irrevocable trust that takes ownership of your asset, distributes any income to your charity of choice and beneficiaries, then sells the asset when the trust’s term ends, or you die.
The beauty of the CRUT is that you designate a trustee to manage those fund distributions. If you name your favorite charity as trustee, the organization has the potential to receive a steady flow of income, can sell the asset upon the trust’s term, and not have to pay taxes on any profit gain.
Your estate doesn’t have to pay taxes on the asset’s sale, either, because your estate doesn’t own it. Basically, if you own highly appreciated assets, and want to donate resources to a worth cause, and not want to generate all kinds of capital gains taxes, the CRUT could provide a logical solution.
Resources for the Non-Profit of your Choice
We’ve pointed out in the past that gifting real estate assets to a charity can sometimes be an issue. As such, it’s a good idea to reach out to the target organization (as well as your financial planner) before deciding to form a CRUT. Still, there are many advantages to forming a CRUT, as follows:1,2
- The trust can potentially convert your non-productive property into an income stream by selling the donated asset tax-free and reinvesting it into stocks, bonds, or a diversified portfolio of both, among other investments. Based on the structure of the CRUT, you could potentially receive an annuity anywhere between 5% to 50% of the trust’s fair market value, which is revalued each year. Note, however, that this income stream received on your end will be subject to income taxes.3
- Transferring your asset into an irrevocable trust will remove it from your estate, resulting in no estate taxes on the asset when you die.
- You could receive a deduction for your income taxes during the year in which you fund the CRUT. This value is based on the type of trust, your life expectancy, the payout to the charitable organization, and an interest rate determined by the IRS.
But, Be Wary
As with any investment, there are a handful if issues to consider before forming a CRUT:
- The legal and administrative costs of setting up a CRUT could be considerable. And, remember that the CRUT is irrevocable. Once that CRUT is in formed and funded, you can’t take back your donation.
- CRUTs are not ideal for all assets. If the house, fourplex or warehouse you want to transfer to a CRUT has a lien or two on it, you might want to rethink putting those items into a unitrust.
- CRUT payments to your non-charitable beneficiaries are taxed (though payments to the charity are not). Though capital gain taxes are lower under the new rules, taxes are taxes.
- The charity you select for the CRUT must be IRS-approved. Your brother-in-law’s artistic career is not a charity. Neither is your daughter’s dancing hobby. Unless starving artists or hopeful steppers are set up as 501(C)3 entities, the IRS doesn’t consider them a legitimate.
- We mentioned, above, that you could take your CRUT funding as a deduction – as long as you are itemizing. If you decide to declare the standard deduction on your income tax, you wouldn’t be able to use the trust as a deduction.
In short, CRUTs do come with their fair share of caveats. But they also could allow you to do something nice for a favored charity or organization, without much of a tax burden.
At Realized, we make it our goal to educate investors on the many tax-friendly tools and investments granted to them by the IRS. Although we do not provide tax advice, we stand ready to assist you with any of the questions you may have. Call us at (877) 797-1031 to learn more about how we can help you manage the taxes in your estate.
- Diversification does not guarantee returns and does not protect against loss.